We should plan, not panic

The ramifications of the Leave vote will take time to unfold. What is already clear is that the money and stock markets here, all across Europe, and even further afield have been hit by a wave of volatility matched only by the turbulence in both major UK parties.

Before the vote the Treasury predicted a vote for Brexit would mean a rise of between 0.7 per cent and 1.1 per cent in borrowing costs (on top of what happens anyway), with the prime minister claiming the average cost of a mortgage could increase by £1,000 a year.

But amid fears that the Brexit vote heralds a period of low growth, some economists are suggesting the Bank of England will have to cut interest rates. In which case the cost of lending (for the Banks, at least) could actually fall but the major lenders are likely to keep rates as they are, not pass on the cuts, and focus on their profitability.

David Tinsley, UK economist at UBS, said he expects two rate cuts from the Bank of England over the next six months, taking interest rates from a current record low of 0.5 per cent to zero. If you have not already done you should consider changing to a 5-year fixed rate mortgage to ensure at least some predictability and stability in your personal finances in the next couple of years.

The International Monetary Fund (IMF) warned that Brexit could cause a sharp drop in house prices. This was based on an expectation that the cost of mortgages would rise. The Treasury has said house prices could fall by between 10 per cent and 18 per cent over the next two years, compared to where they otherwise would have been. This could be good news for first-time buyers, but less so great for existing homeowners.

The National Association of Estate Agents (NAEA) believes house prices in London could see the biggest fall, losing up to £7,500 on average over the next three years, compared to where they otherwise would have been. Elsewhere, it said, values could fall by £2,300.

But since it expects prices to continue rising anyway, this actually means it expects a slower rate of increase, rather than a fall in real values. The reality is that most house prices in the North will probably drop, but in London and the South, apart from the top end of the market, demand will most likely counter any pressure for falling prices.

Silver lining

Opportunities for first-time buyers, if they have the right finances could improve. If you accept the argument that economic growth will be slower outside the EU – in the short term at least – the government’s income could also fall, leaving it with less money to spend. Estimates of the size of that possible shortfall vary between £28bn and £44bn by 2019-20.

As the welfare budget amounts to about 28 per cent of all government spending, it is logical to presume this government will pass on to it a significant proportion of cuts to tax credits and benefit payments.

A report by the National Institute of Social and Economic Research (Niesr) said some families could lose as much as £2,771 a year. In reality, the UK’s economic growth – and potential budget shortfalls – will very much depend on the precise nature of trade agreements, and whether the UK will be a member of the European Economic Area (EEA).

It may also be that the government decides not to keep its earlier promise to balance the books by 2020, known as the fiscal mandate. This would give it much more leeway to maintain benefit payments at current levels.

The Institute for Fiscal Studies (IFS) said that spending might need to be curbed for two further years. This could mean major projects such as the proposed Heathrow expansion and High Speed Rail 2 delayed. This could have a major effect on the construction sector where the big house builders have already seen their share prices hit by last week’s news.

During the referendum campaign, the Prime Minister said the so-called “triple lock” for State Pensions would be threatened by a UK exit. This is the agreement by which pensions increase by at least the level of earnings, inflation or 2.5 per cent every year – whichever is the highest. Again, this assumes a poorer economy, and lower national income.

If the UK’s economic performance does deteriorate, the Bank of England could decide on a further programme of quantitative easing (QE), as an alternative to cutting interest rates.

Pension contributions

If you are 5 years or more to retirement, regular pension contributions will take advantage of any volatility and result in greater fund growth. Those about to retire should hold off until the outlook is clearer as taking out a pension annuity now could result in less income for their money.

In the short term share prices have dropped but this is by no means a longer-term certainty. Shares typically rise with company profits. Big exporters might benefit from the weaker pound, so the value of their shares might well rise, while importers might see profits squeezed.

Big investment platform Hargreaves Lansdown, unsurprisingly, told its clients that it is impossible to know the long-term economic implications of Brexit.

“We cannot assume an ‘Out’ vote will be bad for the long-term prospects of the stock market,” it said.

One should therefore utilize all ISA allowances and look to the longer term to take advantage of any investment opportunities. A fall in the value of the pound will, of course, make holidays to the eurozone more expensive, as we will have to pay more for accommodation priced in euros but the cost of flights will depend on individual airlines and whether the base price is in pounds or euros – as well as the cost of fuel Both Easyjet and Ryanair got in first to say that flights will become more expensive – but because of what they say will be “more restrictive aviation rules”.

As with all of our other planning, shop around for the best rates. Now is the time to review your future financial planning, to ignore this advice could affect your long term security.